Insights 
VT 
The US Consumer Price Index (CPI) is projected to rise 3.1% year-on-year (YoY) in September, exceeding August’s 2.9% increase. The Federal Reserve is anticipated to reduce the monetary policy rate by 25 basis points in the upcoming week.
The Bureau of Labor Statistics will release September’s CPI data on Friday at 12:30 GMT, which may impact the US Dollar’s value. The CPI and core CPI are expected to increase by 0.4% and 0.3% monthly, respectively.
Federal Reserve’s Dual Mandate
The Federal Reserve follows a dual mandate: maintaining price stability and maximum employment, with inflation ideally around 2% YoY. Inflationary pressure persists due to supply-chain issues, and the Federal Reserve is expected to maintain an aggressive stance.
Market analysts predict a 97% likelihood of a Fed rate reduction to 3.5%-3.75% by year’s end. Should the CPI data show unexpected outcomes, it may induce a market reaction, influencing interest rate decisions.
Monetary policy decisions occur at the Federal Reserve’s eight yearly meetings. Quantitative Easing and tightening are tools used in extreme economic situations, influencing the US Dollar’s strength.
We’re looking at a market environment completely different from the one anticipated late last year, which predicted a Federal Reserve rate cut. Today, the Fed Funds Rate is holding steady in the 5.0% to 5.25% range, with no cuts in sight for the remainder of 2025. This pivot from expected easing to a prolonged hold has been the defining story of the year for traders.
Inflation and Interest Rates
The forecast of a 3.1% inflation rate from that time seems almost optimistic now. The latest September 2025 CPI report showed a stickier-than-expected headline inflation of 3.8% year-over-year, driven by persistent service sector costs. This stubbornness in price pressures is the primary reason the Fed has abandoned any discussion of rate cuts for the immediate future.
Consequently, the US Dollar Index (DXY) is not trading near the 99.50 resistance level mentioned in that earlier analysis. We have seen the DXY consolidate around the 108 mark for most of the third quarter, supported by the significant interest rate differential with other major economies. Traders should be cautious about shorting the dollar as long as the Fed maintains its hawkish stance.
For derivatives traders, this means the nature of volatility has shifted. Instead of pricing in volatility around the timing of rate cuts, the focus is now on options that protect against a “higher-for-longer” scenario. We are seeing increased interest in VIX futures and call options on the US Dollar, reflecting uncertainty about how long tight monetary policy will last.
In the interest rate derivatives market, the play is no longer about positioning for imminent easing. Traders are now using SOFR futures to hedge against the possibility of one final rate hike or a timeline for cuts that extends well into late 2026. This is a stark contrast to the market sentiment from late 2024, which had priced in multiple cuts for the current year.
